Let's talk about saving money—why it's crucial, how I manage to save nearly 70% of my income, and why you should consider doing the same. Many people emphasize the importance of saving money and tracking your expenses but often provide generic advice, like creating a spreadsheet and spending countless hours monitoring every cent. Instead, I want to share practical steps that helped me save a significant portion of my income without consuming much time.
Why Saving Money is Essential
Let's face it, many people live paycheck to paycheck. In fact, studies show that over half of Americans, approximately 70%, find themselves in this predicament. The problem with living this way is that when emergencies arise, you might need to go into debt to cover expenses. This is why the payday loan industry in the United States is a $100 billion market, and total credit card debt exceeds $1 trillion.
While avoiding debt is a compelling reason to save, an even more significant reason is the freedom it can buy you. If you're currently working, you're likely trading time for money. By saving enough, you can eventually trade money for time, granting you the freedom to do whatever you desire—whether that's retiring early, traveling the world, or building a business you love. The big takeaway here is to start saving immediately, so your money works for you, not against you.
Get Your Mindset Right
The first and most crucial step to saving is getting your mindset right. Understanding the value of a dollar is vital. For the average person, $1 invested now could be worth over $20 by retirement. Whenever you're about to make a purchase, visualize the item in one hand and the money in the other. This is especially crucial when buying clothes. For example, a $350 jacket you wear twice essentially costs $175 per wear. If invested, that money could grow to over $7,000 by retirement.
Think of your money as little workers or soldiers that work for you, earning more money through investments because of the power of compound interest. Another mindset trick is to delay purchases—wait a day for small items and at least a week for larger ones. Often, the impulse to buy fades overnight. If you still want the item, add it to a list of things you desire. Reward yourself with these items when you achieve goals, creating a natural incentive to accomplish beneficial tasks.
Set Clear Financial Goals
Having a clear financial goal is crucial. Do you want to retire by 40 or 60? Do you aspire to be a millionaire or a billionaire like Warren Buffett? A clear vision acts as a north star, guiding you in the right direction. Without it, you might find yourself going in circles. You don't need to become an extreme minimalist, but maintaining a budget is essential.
Create and Maintain a Budget
The first step to budgeting is tracking your expenses. Download an app like Mint, which takes about 15 minutes to set up. Connect your credit and debit cards, and it will automatically track your purchases. This makes it easy to see where your money goes, allowing you to cut back on unnecessary expenses. You might find subscriptions you haven't used in years, like an old RuneScape membership, which you can cancel.
Realistically, there are about five essential needs: food, shelter, transportation, clothing, and health. Many nonessential items can be eliminated, saving you money. For essentials, you can often reduce costs significantly. For example, I used to spend over $1,000 a month on food, mostly on dining out. By cutting back, I now spend about $300, freeing up $700 monthly for investments.
Reduce Essential Expenses
Reducing essential costs can have a significant impact. For shelter, consider getting roommates to halve or even reduce costs by a third. For transportation, opt for a used car five to ten years old, which has already depreciated significantly, resulting in cheaper insurance and maintenance. For clothing, focus on classic pieces that never go out of style, like black and white shirts and blue jeans, which match well and can be worn year-round.
Automate Your Savings
Automation is crucial. Have a central bank account where money is deposited, and set up automatic transfers to savings or investment accounts monthly. I started by saving 15% of my income, gradually increasing to over 65%. My goal is to retire by 35, so saving 65-70% is my target. Initially, funnel all savings into an account that can cover six months of expenses. Once that's achieved, start investing in index funds, Roth IRAs, or other investment accounts.
Automation tricks your brain into thinking you have less money, reducing the urge to spend. The less you see your money, the less likely you are to spend it impulsively.
Find Happiness in Low-Cost Activities
Lastly, discover inexpensive activities that make you happy and engage in them frequently. This might sound simple, but it's essential. Our brains often trick us into pursuing short-term pleasures that aren't beneficial long-term. Think of bad relationships, unhealthy eating habits, or procrastinating on YouTube. Identify what genuinely makes you happy long-term, and write it down.
Engage in Fulfilling Activities
Examples could include hiking, playing sports, or spending time with friends. If you're an adrenaline junkie, maybe you enjoy extreme sports. Whatever it is, identify and pursue it. For me, making videos and helping people fulfills me. I've always loved filmmaking and video editing, and helping others brings satisfaction.
To summarize, get your mindset right to understand the value of a dollar. Use a simple app like Mint to create a budget and run your finances like a business. Automate your savings, so your brain believes you have less money, reducing spending urges. Finally, find and engage in activities that bring you joy without breaking the bank. Remember, the best things in life are often free.
